Warner Music IPO
By Tue, Feb 18, 2020
Hello Scoopers,
If you live in the U.S., welcome back! How was your long weekend? Are you ready for another week of stock market ups and downs? Let’s hit it with a new edition of our IPO Review series.
Last week, shares of Spotify (Ticker: SPOT) were down approximately 9%. As if the company didn’t have enough publicly-traded competitors already, Warner Music Group has filed to go public too. While Warner Music is not directly competing with Spotify (at least of yet), however, its IPO documents depict a powerfull stronghold over the music streaming industry. Spotify’s investors are worried about yet again another titan they need to monitor. It’s not surprising to see the stock is reacting negatively to the news. As such, in today’s edition of the IPO Review series, we are getting into the nitty-gritty of The Warner Music Group’s IPO.
But first, here is a recap of what happened in the market on Friday:
Market Recap
- U.S. markets: On Friday, the Dow took the opposite direction of the S&P 500 and Nasdaq. However, the indices did not move too far away from where they started the day either. Scroll down to the “Overall Market” section to read more.
- Cryptocurrency: Bitcoin’s price stepped away from new record-high levels, and wrapped the week below the $10,000 mark for a change.
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What happened last week?
Looking at the 5-day return of the market, everything looks very rosy. All three indices finished the week at least 1% higher than where they started it. However, the real impact of coronavirus is just getting started to creep into the market. Apple (Ticker: APPL) announced that it won’t make its Q2 forecast range because of coronavirus. That’s only the first of many such announcements to follow. The next quarterly earnings reports are going to be when we would see the impact of coronavirus in numbers. For now, the market is gliding through the news with some fluctuations in the sentiment. The report of the actual economic impact is yet to come.
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Today’s IPO
Warner Music Group Corp. (Ticker-to- be: WMG) is one of the largest music recording and publishing companies in the world. It records music for superstars such as Ed Sheeran, Bruno Mars, and Cardi B, and publishes music for stars such as Lizzo and Katy Perry. The company has been representing works by over 80,000 songwriters and composers, with a global collection of more than 1.4 million musical compositions. The date of the IPO is not set yet, but it has already chosen the New York Stock Exchange to host its public offering.
Why Warner Music Group?
While the details such as the number of shares and the IPO date are not announced yet, this is no typical IPO. The company already makes more than $4 billion in annual revenue and generates a quarter of a billion-dollar in net income. It doesn’t need cash to continue to grow and as per the company’s leadership, it is only going public to provide liquidity to its current investors and employees. That makes this IPO a rare gem that many investors don’t get a chance to come across quite often.
For this review, we are using the S1 document published by the company in preparation for its public offering.
One thing to remember before delving into the IPO, the company was once a publicly-traded company. Back in 2011, after the initial shock of music streaming on old-school publishing and distribution businesses, it decided to delist itself from the eyes of the public. After about a decade, the company has managed to adjust to the new norm of streaming, it is resurrecting back to the public arena. We can’t contain our excitement for this already profitable IPO. Let’s get to it. Here are the good, the bad, and the ugly things you’d need to know before investing in Warner Music Group:
The Good
- Double-digit revenue growth and profitability. The company’s revenue has been growing rapidly and steadily in the last few years. For example, the revenue grew by 16% in 2019, and by more than 19% in 2018. Moreover, the company is already profitable.
- High profile talent and artist. Take a look at the first page of the IPO documents, and see how many big names and high profile stars are already working with WMG. The music industry is reliant on superstars. And, WMG has access to some of the best talents and artists everyone would want to listen to.
The Bad
- High debt without a repayment plan: The company carries a couple of billions in long-term debt, and hasn’t identified a clear plan for repaying that debt. Moreover, the company plans to pay dividends to its shareholders. However, debt and dividend payments don’t jive well together either without a clear loan repayment plan that makes a logical sense. We yet to see such a plan.
The Ugly
- The current owner is cashing out but retaining control. A little bit earlier we told you about how the company used to be public and then went private in 2011. That was because Access Industries bought the company for $3.3 billion. Now, the IPO is a chance for Access Industries to cash out, which is a fair thing to do, except that it is keeping its control over the company using a special voting class of shares. Access wants to have its cake and eat it too, and that’s never a good thing.
- The artists have choices. Digging deep into WMG’s costs, one truth shines through clearly. Nowadays, artists want bigger cuts, and give away the right to publishing and distributing their music for a shorter time period. RollingStone summarizes this point the best way: “Over the past five years, the percentage of recorded-music revenue Warner has spent on A&R costs (mainly, on artist royalties and advances) has shot up, from 28.7 percent in the fiscal year 2014 to a new high of 32.7 percent in the fiscal year 2019 (+ four percent).”
Valuation
Too soon to say… The company hasn’t announced the number of shares, neither the price range of its IPO. So, this one is yet to be reported.
Final Takeaway
The Warner Music Group is recurring from the land of private to the realm of the public with double-digit revenue and profit. It is one of the first companies that signed streaming deals with YouTube and Spotify to name a few such streaming services. Moreover, it works with high profile artists and talents millions of people want to listen to. Despite a high level of debt and the strange voting power rights granted of the current owners, the company is a rare gem of an IPO.
Overall, we are not yet ready to make a final decision as to whether we would invest or not and added this one to our watchlist until we hear about the IPO price and the valuation in the upcoming IPO documents amendments and updates. Stay tuned!
There you have it. The third edition of the IPO series is in the books now. How did you like it?
What other IPOs should we consider? You can find the list of all new IPOs on the SEC’s website. Click here to see the list. If we get 10 Scoopers to ask for a detailed analysis and review of any specific company, we will dedicate one full Scoop to it just like today’s edition. The power is in your hands now …
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About the Author
The authors of this Scoop are the editorial team at Stock Card, led by Hoda Mehr. Hoda Mehr is CEO and Co-founder of Stock Card and the host of Renegade Investors podcast. She runs a community of 40,000 stock market investors and manages Stock Card's successful flagship portfolio, Roll with Our CEO, on Stock Card Portfolio Store. Hoda is an Economist with an MBA from Concordia, John Molson School of Business. She applies behavioral economics, data journalism, and storytelling to all aspects of her work. Before starting Stock Card, Hoda worked as a strategy and insights lead at technology companies including Symantec, Aimia and Sony. Create a free account to do your stock market research easily and mistake-free: Stock Card Stock Card
